Housing starts plunge to another record low

Home construction falls 33% in 2008, plumbing lowest level in at least 50 years

WASHINGTON (MarketWatch) -- Closing out the third year of the housing bust, construction on new homes took another turn for the worse in December, falling more than 15% to a seasonally adjusted annual rate of 550,000, the lowest on record, the Commerce Department reported Thursday.

Permits to build single-family homes also fell, dropping 12.3% to 363,000 last month, while total permits including apartments dropped 10.7% to a 549,000 annual rate. The figures represented record lows for both single-family and total permits.

Building permits are considered a more reliable guide to the state of the housing market, because they are less affected by weather conditions than the figures on housing starts.

"The financial market shockwave felt in the fall has clearly brought the housing industry to its knees," wrote Stephen Stanley, chief economist for RBS Greenwich Capital. "Builders have essentially closed up shop for a while until the storm blows over."

Since June, starts have plunged 49%. Since the peak of activity three years ago, starts are down 76%.

For all of 2008, housing starts fell 33% to 904,000, the lowest pace of new construction since the government began keeping records in 1959. Building permits fell 36% in 2008 to 892,500.

In all of 2007, 1.355 million homes were started. In 2006, 1.8 million homes were started.

Similar but not identical government data show construction in 2008 was at the lowest level since World War II.

The report was much worse than expected for a second consecutive month. Economists surveyed by MarketWatch had looking for a smaller drop, to an annual rate of about 600,000, in the thinking that November's 15% decline in starts wouldn't be repeated. It was. See Economic Calendar.

The large declines in the past few months could be good news for the economy, on the principle that when you are in a hole, the first thing to do is to stop digging, said UBS economists Maury Harris and Jim O'Sullivan ahead of the report.

"The more starts plunge now, the quicker home inventories are likely to be reduced, potentially limiting the ultimate drop in home prices (the main cause of the financial crisis)," they wrote.

Builders are working to reduce the inventory of unsold homes.

In December, housing completions fell 5.2% to an annual rate of 1.02 million. For all of 2008, completions dropped 26% to the 1.12 million, the lowest total in 17 years.

Conflicting crosscurrents

Some economists see a bottom developing in the housing market. The economy may be on its way to mending itself because housing's finally becoming affordable again, said MarketWatch Chief Economist Irwin Kellner. Read Kellner's weekly column.

Others said the recovery would be elusive.

"There is little sign of a turnaround in the New Year," wrote Sal Guatieri, economist with BMO Capital Markets. "Vastly improved affordability is proving to be no match for tightening credit standards and mounting job losses."

The mood of home builders' has rarely been worse. The National Association of Home Builders reported Wednesday that its sentiment index fell to a record-low 8 in January. See full story.

The government cautions that its monthly housing data are volatile and subject to large sampling and other statistical errors. In most months, the government can't be sure whether starts increased or decreased.

In December, for instance, the standard error for starts was plus or minus 9%. Large revisions are common.

It can take four months for a new trend in housing starts to emerge from the data. In the past four months, housing starts have averaged 698,000 annualized, down from 774,000 in the four months ending in November.

In a separate report Thursday, the Labor Department said first-time filings for unemployment benefits rose by 62,000 last week to 589,000. The number of new claims and continuing claims were at the highest levels since 1982. See full story.

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